Astrana Health, Inc. (then Apollo Medical Holdings, Inc.) — Q2 2020 Form 10-Q
Business context and period. The filing covers the quarter and six months ended June 30, 2020. The company provides population-health management and risk-bearing healthcare services, primarily in California; it reported approximately 1.1 million patients under care and more than 7,000 contracted physicians. Financial statements are unaudited and consolidated.
Financial performance and position
- Q2 revenue: $165.2 million, up 27% year over year. Capitation revenue rose 37% to $140.9 million; management-fee income fell 16% to $8.7 million and fee-for-service revenue fell 41% to $2.3 million.
- Six-month revenue: $330.3 million, up 46%. Growth was mainly from capitation, including the Alpha Care and Accountable Health Care acquisitions and the timing of APAACO’s NGACO performance year.
- Operating results: Q2 operating income was $12.9 million, down 12% from $14.7 million; operating margin was approximately 7.8%, versus 11.3%. First-half operating income was $17.3 million, up from $11.4 million; operating margin was approximately 5.2%, versus 5.1%.
- Net income: Q2 consolidated net income was $81.0 million, including a $99.6 million gain on sale of an equity-method investment. Net income attributable to ApolloMed was $7.0 million, compared with $3.5 million. For the first half, consolidated net income was $84.0 million and ApolloMed-attributable net income was $11.1 million, compared with $8.2 million and $3.7 million, respectively. Diluted EPS attributable to ApolloMed was $0.19 for Q2 and $0.30 for the first half.
- Cash flow: First-half operating cash flow was $12.6 million, versus cash used of $22.0 million a year earlier. Investing activities provided $67.2 million, principally from the UCI sale; financing activities used $30.5 million, including $30.2 million of dividends. Cash, cash equivalents and restricted cash increased $49.2 million to $153.2 million.
- Liquidity and debt: Cash and marketable securities totaled $270.1 million; working capital was $228.0 million. Credit-facility borrowings were $245.3 million, including a $185.3 million term loan and $60.0 million revolver borrowing. The company reported covenant compliance at June 30 and said it expected sufficient liquidity for at least 12 months.
- Medical liabilities: $70.3 million at June 30, up from $58.7 million at year-end 2019. These include estimates of incurred-but-not-reported claims.
Material changes and unusual items
- On April 30, the company sold its 48.9% interest in Universal Care, Inc. to Bright Health for approximately $69.2 million in cash proceeds (including repayment of $16.5 million owed to APC), Bright preferred shares valued at $36.2 million, and a contingent beneficial interest valued at $15.7 million. The transaction generated the $99.6 million reported gain. The filing says UCI was an excluded asset for the benefit of APC and its shareholders; the gain did not increase net income attributable to ApolloMed.
- Acquisitions and membership growth lifted capitation revenue and care costs. The company attributed lower fee-for-service revenue to reduced procedures at surgery and heart centers during the COVID-19 outbreak.
- The company received $0.9 million in government grants in the first half, included in other income.
Guidance, commentary and risks
- Management maintained 2020 guidance: revenue of $665–675 million, consolidated net income of $100–110 million, EBITDA of $155–167 million and adjusted EBITDA of $75–90 million. The filing states that net income and EBITDA guidance includes the UCI sale gain, while the gain did not benefit ApolloMed-attributable net income. Adjusted EBITDA is a non-GAAP measure; the company’s reconciliation excludes equity-method income and includes adjustments for recently acquired IPAs.
- The company cited its subscription-based revenue model in maintaining guidance, but cautioned that actual results could differ materially. COVID-19 uncertainty, possible renewed restrictions, disruption to operations or supply chains, and reduced elective procedures could affect results.
- Risk-pool revenue and NGACO settlements involve significant estimation uncertainty; CMS AIPBP payments are subject to claims, reconciliation and potential repayment. The company reported approximately $7.6 million of monthly 2020 AIPBP payments and had repaid $8.5 million of previously received, unearned capitation during the first half.
- Other risks include regulatory requirements for risk-bearing organizations, medical-claim estimates, payor and receivable concentration, variable-rate debt, and litigation. In a Prospect arbitration, ApolloMed and AMM were dismissed without prejudice; MMG disputes the claims, and the potential loss could not be reasonably estimated. The company reported no material change to its previously disclosed risk factors other than the added COVID-19 discussion.
Important facts for investors to verify
- How much of reported and guided consolidated income reflects the one-time UCI gain, and how guidance translates to earnings attributable to ApolloMed shareholders.
- Whether the UCI contingent consideration and Bright preferred shares realize their stated values; the filing uses significant unobservable valuation inputs and expects contingent-interest settlement to begin in the second half of 2021.
- Medical-cost trends, claims development and risk-pool settlements, including the effect of COVID-19 on utilization and provider costs.
- Progress against revenue and earnings guidance, and the assumptions behind non-GAAP adjusted EBITDA and recently acquired IPA adjustments.
- Debt capacity, variable interest-rate exposure, covenant headroom and the sustainability of dividends; a hypothetical 1% rate change would alter quarterly interest expense by approximately $2.5 million.
- Collection and concentration exposure: two payors represented 35.1% and 33.5% of receivables and related-party receivables at June 30.